IVD Medical Holding (HKG:1931) Is Experiencing Growth In Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at IVD Medical Holding (HKG:1931) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on IVD Medical Holding is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.071 = CN¥227m ÷ (CN¥3.9b - CN¥691m) (Based on the trailing twelve months to December 2020).

So, IVD Medical Holding has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 9.4%.

View our latest analysis for IVD Medical Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for IVD Medical Holding's ROCE against it's prior returns. If you'd like to look at how IVD Medical Holding has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last four years, returns on capital employed have risen substantially to 7.1%. Basically the business is earning more per dollar of capital invested and in addition to that, 320% more capital is being employed now too. So we're very much inspired by what we're seeing at IVD Medical Holding thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 18% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line On IVD Medical Holding's ROCE

All in all, it's terrific to see that IVD Medical Holding is reaping the rewards from prior investments and is growing its capital base. And with a respectable 16% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 3 warning signs for IVD Medical Holding you'll probably want to know about.

While IVD Medical Holding may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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